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Income Tax Filing: How Freelancers, Consultants can Save Taxes while Filing ITR

Jagrity Sharma Jagrity Sharma 30 May 2019

Are you a freelancer? Have you ever thought about filing your taxes? Well, now is the right time to do so.

Income Tax filing

For a salaried individual, filing of income tax is relatively an easy job as most of the paperwork is done by the employer on behalf of the employee. The human resources department keeps the employees well informed about the dates, reminders, guidelines, deadlines, tax saving obligations, Form 16, etc. Also, the template is readily available, the employee simply has to enter their investment declarations and submit the same. The entire process is automated for salaried individuals.

But, what if you are not working in any company and still manage to make good money? What about people in flexible jobs such as consultants/advisors? Read ahead to know more.

Who is a freelancer?

A freelancer is a person who is not officially employed by any company or the government. A freelancer works on his/her own terms and does not receive income from any organization’s through its payroll (salary). Instead, they have multiple clients and projects. Upon completion of successful projects, the freelancer raises an invoice for the services rendered and the client makes the payment.

As per the income tax laws in India, any income that you earn by displaying your intellectual or manual skills is income from a profession and is taxable as Profits and Gains from Business or Profession.

The current rate of tax deduction is 10% on gross income. This means that, Income tax is required to be deducted by the payor wherein payment is made to a freelancer exceeding Rs. 30,000. If you have been charged Rs. 1 lakh by a freelancer for official business work, you (business entity) would pay Rs. 90,000 as payment, while Rs. 10,000 will go to the income tax department as TDS.

Since the work conducted by a freelancer is for business purposes, it is applicable for income tax. A freelancer can also claim certain tax deductions for the same. These deductions are similar to the ones claimed by salaried people.

Let us know more about filing income tax for freelance professionals.

Income Tax Returns for Freelance Professionals

A freelancer can declare the following expenses (for tax rebate) while calculating taxable income: House rent allowance, depreciation, repairs, office expenses, meal, entertainment, hospitality expenses, travel expenses, local taxes, software expenses, website expenses and insurance. We have carefully dissected every category to help you understand better.

Investment Declarations

As a freelancer, you are entitled to deductions of up to Rs. 1,50,000 as per Section 80C of the Income Tax Act, 1961. Under this section, investments made in the following schemes are applicable for tax benefit.

  1. National Saving Certificates
  2. Public Provident Fund
  3. Fixed Deposit
  4. Post Office Time Deposit Account
  5. Life Insurance
  6. Payment of tuition fees to school, college, University, Investment in Units of UTI or mutual fund (ELSS).

Medical Insurance

As per Section 80D of the Income Tax Act, 1961, medical insurance for payment made towards premium can also be claimed by a freelancer. The eligible amount is Rs. 25,000 for self, spouse and dependent children while the amount is Rs. 50,000 for a senior citizen.

Education Loan

As a freelancer, if you have taken an education loan from a financial institution/bank/charitable institution for the purpose of higher education (for yourself or a relative), a deduction is allowed, but only on the interest payable and not on the principal amount. Another benefit is that this deduction is allowed for 8 financial years or until such time the interest is paid in full.

Contributions to Charitable Organizations

When you make financial contributions to certain charitable trust funds, the entire contributed amount can be claimed for deduction. A few of the trust funds are:

  1. Kerala Chief Minister's Distress Relief Fund (CMDRF)
  2. Bharat Ke Veer Corpus Fund
  3. Prime Minister's National Relief Fund

Deduction for Interest

Interest on deposits in a savings account with a bank/cooperative society/post office is allowed for deduction. The general limit is Rs. 10,000 for normal individuals and Rs. 50,000 for senior citizens.

Medical Treatment in case of disability

As a freelancer, if you have incurred expenses for medical treatment on account of your own disability or disability of a dependent family member, you can claim a deduction of up to Rs. 75,000 for disability and Rs. 1,25,000 in case of severe disability.

Interest on Home Loan

The interest paid on your home loan is eligible for deduction. The eligible amount is for both self-occupied and let-out property. The maximum amount is Rs. 2 lakhs for a year. An additional tax benefit of Rs. 50,000 can be claimed in case an individual has only one house property.

Presumptive Income Scheme

As a freelancer, if you are earning income less than Rs. 50 lakhs, you can declare only 50% of their annual income as taxable income.

Applicability of Goods & Services Tax (GST)

Earlier, Value Added Tax and Service Tax was applied on freelancers. Now, both have been replaced by GST.

  1. For Sellers - If you are a seller, the rate of GST depends on the item you are selling. If you are a house chef and sell bakery items such as cakes and pastries, the GST applicable on these products will be 18%.
  2. For Service Providers - If you are a registered service provider such as an internet provider or a telecommunications provider, you will be required to charge 18% GST on all your clients and vendors.

What is ITR-3 or ITR-4 Form?

For regular salaried individuals, form ITR-1 is required to file taxes. Freelancers and consultants/advisors are required to fill the form ITR-3 or ITR-4 for filing taxes. ITR-3/ITR-4 applies to income from business or profession. Also, a freelancer can opt for presumptive taxation and declare 50% of their gross receipts as their income by filing ITR-4.

Thus, as a freelancer, you need not worry as you have every right to claim deductions. You can avail various income tax benefits and save taxes while filing your income tax return.

Jagrity Sharma
Written by Jagrity Sharma
A bibliophile who hates alliterations, but loves cream, comics and content immensely! On another note, a content marketer who leverages the power of words to explain...almost anything!